RCEP – the world’s largest trade agreement and its impact on FDI

What is the Regional Comprehensive Economic Partnership?

Several Asian and Oceanian countries just announced the creation of the world’s largest free trade agreement. Negotiations on the Regional Comprehensive Economic Partnership (RCEP) first started in 2013 and the final agreement was signed last Sunday (15th November 2020). The members include China, Japan, South Korea, all ASEAN countries as well as Australia and New Zealand. Together they account for 29.6% of global GDP making it the world’s largest free trade bloc.

The agreement is intended to foster economic integration by removing tariffs and quotas for over 65% of goods traded. It will also implement common rules of origin as well as investment provisions. RCEP is seen as less ambitious than other free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11) as it does not include topics such as labor or environmental standards. However, this is why it was able to appeal to a larger number of countries.

What does the agreement have to say about FDI?

Chapter 10 of the agreement covers topics related to FDI. It includes standard provisions such as most-favored nation treatment and fair and equitable treatment standards. But it does not include any Investor State Dispute Settlement (ISDS) mechanism to enforce these on an international level.

Articles 10.16 and 10.17 are concerned with investment promotion and investment facilitation respectively. The participating countries are supposed to promote the region as an investment area by cooperating in investment promotion activities. This might also open the possibility for a regional investment promotion agency, possibly under a future RCEP secretariat, such as that currently existing for the COMESA region in Africa.

Further, the member countries agree to facilitate investment under their own laws by simplifying procedures and creating focal points and one-stop-shops. This provides an opportunity for countries, who have not done so yet, to implement these kind of facilitation processes and institutions.

How will this impact FDI flows?

The RCEP countries currently account for 16% of global FDI stock and 24% of global FDI flows (UNCTAD) making the trade bloc a major FDI destination. According to data from the Financial Times, China is the largest recipient of FDI in RCEP followed by Vietnam and Thailand. Japan is the largest source country of FDI within the group of RCEP countries followed by South Korea and Singapore.

The agreement includes countries that have seen a recent surge in FDI inflows such as Vietnam and Thailand, which have benefited from firms looking for alternatives to China.

RCEP also includes countries that are currently more restrictive to FDI. According to the OECD, Indonesia is the most restrictive country in the world when it comes to FDI. China (3rd), New Zealand (4th) and South Korea (10th) also all feature in the global top 10. The signing of the agreement can be seen as a shift towards a more favorable position on inward FDI. Less restrictive FDI regulations combined with the easing of trade will lead to new FDI opportunities for international investors.

It is noteworthy, that RCEP includes a very diverse group of economies. Some countries are among the world’s most technologically advanced while others are still in earlier phases of their economic development; some are capital rich whereas others have a large labor force offering competitive wages. This diversity creates opportunities through the complementarity in economic structures.

Likely outcomes of this will be:

• Increasing FDI flows from capital rich North East Asia to labor rich South East Asia. This is an acceleration of an already existing trend.
• Further regionalization of supply chains. Due to tariff disputes and pandemic uncertainties, there is an ongoing dynamic towards regionalizing supply chains. The tariff reductions between RCEP countries will support the development of regional supply chains among participating countries
• Indonesia has much to gain as the largest country in Southeast Asia by easing restrictions on inward FDI.
• India and Taiwan will be at a disadvantage as they are not part of the agreement. In the case of India, the country left the negotiations in 2019 over fears of imports displacing domestic production in the country.

Recommendations and opportunities for IPAs

RCEP opens up new opportunities for investment promotion agencies (IPAs) to attract FDI to their countries. Recommended activities for IPAs include:

• Identify new export opportunities arising from the decrease in tariffs and promote these to potential investors who can use your location as a base for exporting to the RCEP countries.
• Analyze supply chains in your region and identify investment opportunities stemming from the trend towards increased regionalization of supply chains.
• Engage in joint and cooperative investment promotion activities to promote the region overall to investors from other parts of the world.

RCEP comes at a time when the framework of global trade has come under attack and when foreign direct investment is plummeting. The agreement creates new investment opportunities and has the potential for strengthening collaboration between member countries. However, it also points to an increasing regionalization of economic activity, which will impact corporate location footprints and the efforts of countries to attract investment.